Vladimir’s Venezuela - Leveraging loans to Caracas, Moscow snaps up oil assets
UParia Gulf, the two industry sources told Reuters. In a separate proposal first reported by Reuters last month, Rosneft would swap its collateral on 49.9 percent of Citgo – the Venezuelan owned, US-based refiner – for stakes in three additional PDVSA oil fields, two natural gas fields and a lucrative fuel supply contract, according to two sources with knowledge of the negotiations. nder the proposal, Rosneft would also take increased management control over all the joint oil projects between the two firms. Rosneft secured the collateral late last year on a loan of $1.5 billion to PDVSA.
The negotiations over a collateral swap are driven in part by a recent threat from U.S. President Donald Trump to sanction Venezuela’s oil sector as punishment for Maduro’s efforts to undermine the nation’s elected congress.
Rosneft has already been sanctioned by the United States over Russia’s annexation of Crimea from Ukraine in 2014. Such actions require US firms to end business relations with sanctioned entities.
Russian oil deals undermine democracy
Maduro’s need for Russian cash played a key role in a move by his political allies earlier this year that destabilized Venezuela’s already teetering democracy, the top Venezuelan government official told Reuters.
In March, the nation’s Supreme Court - whose members are loyal to Maduro - took over the powers of the opposition-controlled National Assembly. A majority of elected Assembly members opposed any new oil deals with Russia and insisted on retaining power to veto them.
Days later - after fierce national protests against the action - the court returned most powers to the national legislature at Maduro’s public urging. But the court allowed the president to keep the legal authority to cut fresh oil deals with Russia without legislative approval.
The episode was pivotal in escalating daily street protests and clashes with authorities that have since caused more than 120 deaths.
Maduro needed sole authority to cut new oil deals to clear the way for Rosneft’s expansion, the top Venezuelan government official told Reuters.
“Pressure from Russia has played an important role in Nicolas Maduro’s decisions,” the official said, speaking on condition of anonymity because he was not authorized to make public comments.
Rosneft said this month that it has lent a total of $6 billion to PDVSA. In total, Russia and Rosneft have delivered Venezuela at least $17 billion in loans and credit lines since 2006, according to Reuters calculations based on loans and credit lines announced by the government.
Venezuela does not publish the full details of the debts it owes Russia.
Maduro has sought to limit the power of congress since the opposition won a majority in 2015.
In late July, he created a legislative superbody called the Constituent Assembly in an election that was widely criticized as a sham. Allies of the Socialist Party won all 545 seats in the new assembly, which has the power to rewrite the nation’s constitution, dissolve state institutions - such as the opposition-run Congress - and fire dissident state officials.
Spiral of debt, dependence
Venezuela’s oil-based economy has collapsed since international prices crashed to a low of $24 per barrel in early 2016 from more than $100 in 2014. Prices now hover at about $50, which hasn’t proven high enough to pull Venezuela out of its tailspin.
Nearly all of the nation’s export revenue comes from oil, so income has fallen sharply and a shortage of petrodollars has left Maduro’s government unable to finance the generous subsidies of food, medicines, fuels, power and other public services instituted by his predecessor, Chavez.
The erosion of subsidies has contributed to rapid inflation, which is forecasted to top 700 percent this year by the International Monetary Fund. Venezuela’s currency, the bolivar, has become nearly worthless.
Government spending cuts have also slashed budgets for maintaining the nation’s oilfields, refineries, ports and tankers, causing Venezuela’s oil output in the first half of 2017 to fall to nearly its lowest level in 27 years.
PDVSA is repaying a growing portion of its mounting debts to Russia with oil, according to internal PDVSA trade data reviewed by Reuters. The oil payments are choking off the cash flow from its petroleum business thereby creating the need for more loans.
Circling oil assets
The nation’s downward spiral has put Rosneft in a position to acquire Venezuelan oil assets on the cheap.
Of the package of stakes PDVSA has offered to Rosneft, the most valuable is a 10 percent stake in Petropiar, a multi-billion dollar project to produce and upgrade extra heavy crude in the Orinoco Belt.
The value of the stake is likely between $600 million and $800 million, based on the valuations of similar deals.
The rising volumes of Venezuelan crude that Rosneft receives have made the Russian firm a middleman in sales to refiners that once bought directly from PDVSA. The oil payments have also helped Rosneft grow a major oil trading business to complement its massive production apparatus.
In the process, the Russian firm has appropriated some of PDVSA’s hard-won international supply deals and valuable trading relationships with refiners as far afield as China, the PDVSA documents show.
At today’s prices, the Venezuelan oil exports that flow to Rosneft would be worth about $3.6 billion annually. And the flow of PDVSA crude to Rosneft is expected to keep increasing, according to the internal PDVSA documents. Most of it is sold into the United States, according to the documents.
Rosneft also will soon start selling Venezuelan crude to India’s refiner Essar, taking PDVSA’s second largest customer in the Asian country.
“Russia is taking everything they have,” said an oil trader who regularly deals with PDVSA.
A dicey investment
The Russian strategy has its risks. Many of the world’s top energy firms took a hit when Chavez nationalized their assets, and an opposition-led government could later reverse or revise any deals Maduro cuts without their blessing.
Venezuela’s bond yields are among the highest in the world because of the nation’s high default risk. The bonds pay nearly 30 percentage points more than benchmark U.S. treasuries.
PDVSA’s many connections to the United States oil industry also raise the specter that the deals now under negotiation could run afoul of US economic sanctions already in place against Russia and threatened against Venezuela.
The Petropiar project, for instance, is 30 percent owned by US oil major Chevron Corp.
Should Rosneft take a stake in the project, it could be complicated for Chevron to ensure it is not violating US sanctions. In the meantime, Chevron has sent guidelines to executives to ensure they comply with sanctions, an employee at Chevron told Reuters.
The guidelines advise staff, for instance, to avoid oneon-one meetings with sanctioned entities or officials, the employee said. In a statement, Chevron said it abides by “a stringent code of business ethics” and complies with applicable laws.
For now, Russia’s status as chief lender to PDVSA has put Rosneft in a position to supercharge its holdings and profits in the region.
If Venezuela’s government defaults on its debt payments - an increasingly likely scenario - Rosneft likely will be one of the entities at the front of the queue as a creditor because of its large collateral stake in US-based Citgo, according to a confidential independent analysis of its debt commissioned by an investment fund and seen by Reuters.
Representatives of Citgo, PDVSA’S largest foreign asset, did not respond to requests for comment.
Guns for oil
Rosneft’s involvement in Venezuela can be traced back to a $4 billion arms-for-oil deal in 2006 that cemented the bond between the governments of Chavez and Putin. Chavez, a former military officer, signed the deal himself in Moscow.
Shunned by the United States - which since 2006 has refused to supply spare parts for Venezuela’s fleet of USbuilt F-16 fighter jets - Chavez bought Russian Sukhoi fighter jets, helicopters, tanks and guns from Putin.
Top executives from Rosneft and PDVSA were later involved in negotiations related to the military purchases because Rosneft was the Russian entity receiving the Venezuelan oil cargoes used to pay for a portion of the weapons, the top Venezuelan government official told Reuters.
They included Rosneft President Igor Sechin, a powerful long-time advisor and deputy to Putin. Sechin is a trained linguist who began his career as a military interpreter and has a passion for the history of Latin America’s revolutionaries, according to two people who worked with him.
He had a direct line into Chavez until the former president’s death in 2013, the Venezuelan official told Reuters. Sechin has maintained close ties with Maduro and the two meet regularly, the official said.
Speaking to reporters in at a hydroelectric plant in Russia last week, Sechin called Rosneft’s growing investments in Venezuela an obvious and essential play.
“This is a country with the world’s hydrocarbon reserves,” he said, referring to a central component of oil and natural gas. “Any energy company should aim to work in this country ... No one could force us from there.”
Russia was swift to defend Maduro’s government from international criticism after the Supreme Court moved to nullify congress, with Moscow issuing a statement saying foreign governments should not meddle in Venezuelan domestic politics.
Sechin was Maduro’s guest of honour at a ceremony last October to unveil a Russian-made granite statue of Chavez erected in the late president’s hometown of Sabaneta.
In the sweltering heat, a Russian choir dressed in black sang the Venezuelan anthem in heavily accented Spanish before Sechin addressed the crowds of mostly red-shirted Socialist Party supporters.
“Thank you for trusting us,” Sechin told the crowd in Spanish during the speech, broadcast on Venezuelan state television. “Russia and Venezuela, together forever!”